The personal blog of Adam Nash

Apple TV: Lead Zeppelin or Disruptive Rocket?

There is a fun debate going on right now, in the weeks building up to the shipment of the Apple TV.

The question is, will the Apple TV be a disruptive engine that will radically reshape the economics of TV and Movies? Or, will it fall in the category of gorgeous, but underpowered boxes that fail to find an audience (et tu, G4 Cube?)

Now, I am not going to spend time here on the following, over-contested, issues like:

The Apple TV has too little storage

The Apple TV only has HD outputs

The Apple TV doesn’t include DVR functionality

The Apple TV doesn’t offer any “new” features

Sorry, but these arguments aren’t compelling reasons why the Apple TV won’t work. The Apple TV has plenty of storage for caching. Composite outputs are on almost every TV sold in the past five years. The Apple TV is not meant to be a DVR (see below). As for “new” features, like the iPod did?Jason O’Grady has been writing great posts about Apple products for over a decade. He recently penned this article:

He basically argues that the problem with Apple TV is that unlike music, Apple cannot ship DVD-ripping software to customers. As a result, consumers will have no easy way to convert their existing content (DVDs) to digital format.

Personally, I think Jason hit the nail on the head – what will make or break the Apple TV will be the supply of content for it. Right now, there are three sources that matter:

User created content (Photos, Movies, Playlists)

Converted digital content (DVR, DVD)

iTunes content

I am just not sure that (1) and (3) are enough to make this platform work for most users. There will have to be a solution for (2).

However, unlike Jason, I am not sure that Apple has to ship this software themselves to make this successful. Companies have had excellent success defeating lawsuits to sell “DVD Copy” software that breaks encryption. As long as people use the software purely for their own use, the courts have not yet upheld that the DMCA restrictions will apply. Converting a DVD to another format for personal use certainly seems like it would fall under fair use, but that has yet to be tested in court.

In the meantime, if people want DVD Ripping software, it’s possible that retailers will step into the void to offer promotions and bundles, just to compete with the Apple online store. Imagine:

Option 1: Apple.com selling the Apple TV for $299

Option 2: MacWarehouse selling the Apple TV bundled with the new “DVD2AppleTV” software for $329? $309? Maybe even $299?

We’ll see, but the market very well may step in here and fill the void.

Why? Because the current distribution channels for video, cable and satellite, have priced themselves into a very expensive place.

Check out this article from this personal finance blog, Get Rich Slowly. It confirms a trend that I’ve been hearing from a lot of my 20-something and 30-something friends.

The logic goes like this:

Cable/Satellite in HD is expensive

Pay channels are expensive

I hate waiting to watch shows week-to-week anyway

I hate watching bad shows, trying to figure out which ones will actually be good.

I don’t have time for that much TV on a regular basis – I need to consume it in bursts when I travel, or when there are lulls in my life.

These are the trends that have driven NetFlix and Tivo, but now iTunes has provided another path.

You drop your cable subscription. You take the over $1000/year you save and put it into:

Movies for big-budget blockbusters

Netflix for movies at home

iTunes for TV shows that your friends say you have to watch

I think Apple has a shot with (3) eventually subsuming (2) if they get the content.

My sister, for example, is 21, and a senior at college. She just recently discovered The Office, and has been catching up on all the episodes.

She didn’t buy the DVDs – they don’t extend to the current season anyway. She just bought them on iTunes.

We’ll see what happens with the Apple TV this year. It’s possible this will be a dud.

But I know I want to buy one (actually four, if you’ve read my previous posts). I’m interested in it as a solution to get rid of the DVDs that my 2-year-old son continues to maul.

However, I wonder if we aren’t underestimating the potential for iTunes -> TV as a disruptive channel. I personally spend over $1000 per year for content through DirecTV… is that really rational? How many movies and TV shows could I buy through iTunes and on DVD for that? Is it worth it?

If it turns out that there is an early adopter market that is ready to buy the Apple TV because they either have figured out DVD ripping, or they already purchase iTunes video content, then this just might work. Once demand for the Apple TV is strong, other vendors will likely step in to make the DVD ripping problem go away. Oh sure, the MPAA will fight it tooth-and-nail. But it’s more likely they’ll be forced to put more content on iTunes, and price it more competitively.

3 thoughts on “Apple TV: Lead Zeppelin or Disruptive Rocket?”

I think this makes sense. I’m considering buying one, and I’m in that weird “refuses to pay for cable” group. I rely on GreenCine (Netflix alternative) for movies and TV shows but the lag is a little too much — we’re only on Season 2 of Deadwood. The hitch is the DRM — it got so frustrating with iTunes I went back to buying physical media.

I’m not sure you should rule out DVR as a deal breaker. As Steve Jobs already pointed out in his recent article, the amount of music on iPods that are purchased from the iTunes store is very, very small. The vast majority of content on people’s iPods come from it being compatible with their primary source of music consumption outside of the iPod.

For music, that primary source of content was CD collections, and the music companies didn’t stop Apple from letting people import their CD collections into iTunes, so it was all good. But for video, I really don’t think DVDs are people’s primary source of content, even if they were to be importable into iTunes. Yes, there are a few of us out there who are obsessive about our DVD collections, but for most people the TV is the primary source of video content, with the movie theatre and DVDs in a tie for second place.

Of course, Apple doesn’t want to integrate with TV programming any more than it wants to integrate with radio programming, so I think any kind of DVR integration in the next 5 years is highly unlikely. But that fact is indeed something that will prevent Apple TV from becoming an iPod-level consumer success.

The people who will be most likely to buy Apple TVs are:

1) Audio/video nuts who buy pretty much every TV-related product out there (the kind of people who bought widesceen TVs when they were new, and actually give a damn about HD-DVD).

2) People who only watch a few TV shows and don’t want to pat $40-60/month for the cable or satellite bill (plus TiVo so they don’t have to arrange their schedule around TV) to see those few shows.

3) People who don’t like the TV format (even with TiVo), and want to watch their TV shows uninterrupted, but don’t want to have to wait a year for the DVD release.

As much as people hate paying their cable/satellite bills, they’re used to paying them and will not be willing to give them up entirely unless the replacement technology is mainstream and reliable enough to make the transition easy. This first generation of Apple TV doesn’t do that. Not the way the iPod did in replacing the CD Player.

My ex-roommate summed it up perfectly at the end of a days-long debate we had over the merits of Apple TV. While Apple TV might make sense for people like you and me, his perspective was that “it solves a problem I don’t have.” I think he is far more representative of the mainstream consumer than you or me.

Apple TV sales will be modest the first year, selling only to the aforementioned categories of early adopters. Its popularity could get a big shot in the arm if the hardware cost goes down enough that people who are already invested in their current TV setup buy them as photo album viewers or music jukeboxes. But even that will wake a while before it becomes popular.

When Apple TV is competitively priced against DVD players and the cost of buying 3-4 season passes is cheaper than the yearly price of an HBO subscription, we’ll see some action. But for now they’re going to be higher-end geek gadgets for the videophiles.

[The following is only half serious…]
One of Apple’s biggest potential cash cows might be replacement remote controls. While those things are sexy when you’re thinking about them in the context of having them next to your computer, they’re going to be a pain in the arse in the living room, where even full-sized remotes have made the phrase “honey, where’d you put the clicker?” commonplace. Although I’m guessing it will be an Apple partner that comes out with a more ergonomic, easy-to-hold, harder-to-lose replacement remote and sells it for a fraction of Apple’s price.